New developments on the doctrine of frustration

In two 2018 decisions, Canadian courts considered the boundaries of the doctrine of frustration. Frustration occurs when two parties can no longer meet their contractual obligations, through no fault of their own, due to an unforeseen “frustrating event” that precludes the execution of the duties under the contract. In the employment context, this often occurs after an employee has been absent from work for medical reasons for an extended period and it becomes clear the employee will never be able to return to work and fulfill his or her obligations under the employment agreement. However, it can also arise in other circumstances where the terms of the employment contract become impossible to fulfill. Two recent cases, this case and this case, provided clarity as to how this doctrine operates in the employment context. The first case was a federal case decided under the Canada Labour Code (CLC) while the second was an Ontario decision; however, both decisions provide useful guidance for employers when considering whether an employment contract has been frustrated.

In this case,a truck driver’s employment was terminated after his employer’s new insurance provider indicated it would not cover him. The employer alleged that this amounted to frustration of contract and that accordingly, it had just cause to dismiss the employee. In the federal jurisdiction, employers are not allowed to dismiss employees without notice or pay in lieu thereof unless they have just cause. The employer argued that the employee’s inability to be insured frustrated his ability to do the job and that this, therefore, amounted to just cause. The arbitrator disagreed finding that frustration cannot be used to make out a claim of just cause under the CLC.

The arbitrator reached this conclusion by considering the commonly understood meaning of just cause for dismissal. He found that just cause must emanate from some wrongful action on the employee’s part; and that the employee in this case had done nothing culpable. The arbitrator went on further to say that the unjust dismissal provisions of the CLC were meant to provide non-unionized workers with substantially similar protections to those enjoyed by unionized workers. In the unionized context, employers cannot typically end an employee’s employment by relying on a single frustrating event and accordingly, allowing employers bound by the unjust dismissal provisions of the CLC to do so would deny federally-regulated employees of the protections they were meant to enjoy.

In this case, an Ontario court dealt with the situation of an employee who had been with the company for 10 years before he was required to be off of work due to a disability. He stayed off of work for three years and was in receipt of long-term disability (LTD) benefits for two of those years. After two years, the insurance provider notified the employer that in its opinion, the employee was permanently disabled from his own occupation and any occupation. A year thereafter, the employer terminated the employee’s employment alleging that his employment contract had become frustrated.

The court found for the employer and concluded that the employee’s three-year illness had indeed frustrated the contract of employment. The court noted that the employer had rightfully relied on the following information in concluding that the contract had been frustrated:

the insurer’s determination that the employee was sufficiently disabled to be in receipt of LTD benefits;

representations made to the insurer, by the employee, after the employee’s employment was terminated where the employee indicated that his condition had not improved (despite telling the employer otherwise); and

the fact that the employee continued to receive LTD benefits.

The statements made by the employee to the insurer as part of the LTD process would typically have been inadmissible in refuting the employee’s claim, however the court allowed it in this case because the evidence directly contradicted the employee’s claim that his condition was improving and that he would likely be able to return to work in the near future. In particular, the evidence from the LTD process refuted the employee’s claim that he would have provided corroborating medical information substantiating his ability to return to work if only the employer had asked.

The court did not ultimately address which party in an employment relationship should bear the obligation to submit or request medical information in the frustration context. However, the decision illustrates that employees will not be able to make false claims in court that their medical condition was improving where there is post-termination evidence from a disability insurer contradicting that assertion.

Takeaway

The doctrine of frustration has long persisted in the law of contract, but where employment agreements are concerned there is still a great deal to be clarified with respect to where the threshold for frustration lies. As the first decision indicates, the doctrine of frustration does not apply to federally regulated employers. However, in Ontario, employers can argue that an employment contract has become frustrated where an employee has been off work for an extended period due to a medical condition and there is no prospect of the employee’s return to work. While in the first case, no frustration of contract was found, the decision highlights how the concept can be used in contexts other than employee disability—employers should, therefore, consider the applicability of the doctrine of frustration when a situation arises that effectively renders the employee unable to fulfill the essential duties of their position.